
BULLETIN 



THE UNIVERSITY OF TEXAS 

No. 228 

FOUR TIMES A MONTH 

GENERAL SERIES 26 APRIL 22, 1912 

Everyday Economic Errors 



LEWIS H. HANEY, Ph. D., 
Professor of Economics, 
The University of Texas. 




PUBLISHED BY THE UNIVERSITY OF TEXAS 

AUSTIN, TEXAS 

Entered ai second-class mail matter at the postoffice at Austin, Texas 



*0' 



no#*l* 



491-412-lm-1217 



BULLETIN 

OF 

THE UNIVERSITY OF TEXAS 

No 228 



FOUR TIMES A MONTH 



GENERAL SERIES 26 



APRIL 22, 1912 



Everyday Economic Errors 



LEWIS H. HANEY, Ph. D., 
Professor of Economics, 
The University of Texas. 




PUBLISHED BY THE UNIVERSITY OF TEXAS 

AUSTIN. TEXAS 



Entered as second class mail matter at the postoffice at Austin, Texas 






Cultivated mind is the guardian 
genius of democracy. ... It is 
the only dictator that freemen ac- 
knowledge and the only security that 
freemen desire. 

President Miraheau B. Lamar. 



0. if ¥> 






PREFACE. 



The writer would preface the following: discussion by calling 
the reader's attention to the fact that many important mat- 
ters are here dealt with in very small compass. Necessarily, 
then, some explanations and small qualifications are omitted. 
The aim is to give a concise and forceful statement of common 
errors, together with the gist of the criticism. If discussion is 
promoted and more accurate thought directed to hazy notions, 
the writer's object will have been attained. 



EVERYDAY ECONOMIC ERRORS. 



Every day, in common speech or in the newspapers, one 
meets with statements which to the economist seem erroneous. 
Now, such statements come from some selfish special "interest;" 
again, from some enthusiast lost in a haze of sentiment. Here 
a socialist of the radical and ill-balanced type speaks ; there it 
is the narrow prejudice of ignorant conservatism. So compli- 
cated are the facts and forces of the industrial world, that few 
are able to see its problems from all sides or in all relation- 
ships, and consequently loose reasoning and fallacies are unusu- 
ally common in economic thought. It is the irony of fate that 
a complicated and abstract science should have as its province 
the ways in which men get their daily bread, and the ordinary 
phenomena of the business world; and that on subjects con- 
cerning which no one hesitates to 'form an opinion, a high de- 
gree of scientific training or a broad and varied experience is 
necessary to enable one to see the truth. 

Kconomie life moves in a sort of circle. Put in a nutshell, 
men consume to produce and at the same time produce to con- 
sume; sometimes it is hard to tell whether we work to eal or 
eat to work. By the same token, the same men are generally 
both producers and consumers. And so, if some politician ar- 
gues that a tariff duty on raw wool is passed along by the man- 
ufacturer and merchant to the consumer, and that with an in- 
crease, he forgets, perhaps, that this consumer is also a pro- 
ducer — a worker as well as an eater and wearer — and that his 
product is needed by the woolen manufacture]- in the latter 's 
capacity of consumer; that -the duty is handed, around a circle. 
rarely coming to one who is a mere consumer. One can't keep 
piling it on the consumer indefinitely, for, worm though he is, 
as a producer he will turn. This case is mentioned to bring 
out forcibly the circular nature of economic life, and so lead 
up to a series of common errors, some of which get lost in the 
circle (perpetual motion), while others seek to move backward 
against the stream (put the cart before the horse). 



8 The University of Tent.-; Bulletin 

either of prosperity or depression. The explanation is the fact 
that trade statistics do not tell the whole truth. A part of our 
imports consist of unrecorded services rendered to us by foreign- 
ers, such as ocean carriage, loans of capital, and the like. 
Thus, besides silk, tea, cutlery, and other goods, our import 
statistics should show millions of dollars worth of ocean trans- 
portation received from the merchant marine of England and 
the Scandinavian countries, and millions of capital invested by 
French, English, Dutch, and other capitalists. Adding these 
"invisible" imports to the visible merchandise-imports gives our 
true aggregate imports, and explains why we exported some 
specie in spite of what seemed to be a so-called favorable bal- 
ance. Generally it is foolish to worry about the balance of 
trade or to adopt protective measures to modify it. Ultimately, 
goods and services exchange for goods and services, and, con- 
sidering all elements — those visible in statistics and also the 
unrecorded ones — the balance must be equal as surely as what 
goes up must come down or the perpetual-motion machine is a 
delusion. 

Now for the city. The "patronize-home-industry" cry is 
here the form which the fallacy takes. To fear outside pur- 
chases in general is little less foolish than the national balance- 
of-trade notion, and rests upon a sort of municipal protection, 
backed, in this case, by moral suasion. In fact, the same perpet- 
ual-motion fallacy is involved. Is it not true that the great 
majority of the men in any given town are producers, creating 
some form of utility in the shape of goods or services? How, 
then, do they pay for the things that they buy? Is it not with 
the things which they produce and sell? Surely, from their own 
products comes the effective demand. Then, as surely does it 
follow that in order to make these outside purchases which are 
so decried, the inhabitants of the town must have a reciprocal 
outside demand for their products. The importation of goods 
can not, in the long run. decrease the demand for home goods, 
for the reason that the imported goods will necessarily be paid 
for with the products of home industry. As with the nation, 
the bogy painted by some merchants, which represents a perpet- 
ual drain of money from their town to feed producers else- 
where, is without logical substance. 



Everyday Economic Errors 9 

Like the steel manufacturer and his protection, the retailer 
opposes changes which will impinge upon his own interests. 
That is natural. But in all cases in which his goods are not 
as cheap as the outside competitor's, he must yield — just as the 
tariff on steel must be lowered. Plate glass fronts, shiny de- 
livery wagons, and square yards of advertising are not what 
we, the people, want. We want the goods as cheaply as they 
may be bought. Nor are we logical in subsidizing "men to stay 
and keep up these unessential things just because they pay 
taxes. "Furniture dealer A is an old citizen and pays taxes 
here ; therefore I '11 trade with him, even though I could do bet- 
ter outside," I hear grocer B say. But Mr. B is perhaps over- 
looking the fact that he himself, along with all other local buy- 
ers of furniture, may be virtually paying AY taxes. And he 
may forget the fact that his gains from A are offset by A's 
gains from him — more than offset in the case of Messrs. C and D, 
the laborer and teacher. Whole communities are taxed to sup- 
port A's and B's, a considerable part of whose goods could be 
secured elsewhere with a net gain to the consumer. 

Of course, all this presupposes (1) that, on the whole, produc- 
tion is directed according to individual wants, (2) that the town 
must, in practice, depend upon outside producers for its supply 
of many goods and services. Moreover, it seems reasonable to ' 
assume (3) that the merchant's function is to supply the wants 
of customers at the least expense compatible with a normal 
profit ; and that if this function is not filled, the greatest good 
of the town demands that the merchant fail. The only rational 
alternative to this view is Socialism. 

Another circle of error in which economic reasoners often go 
astray is that which leads to the conclusion that the nation is 
suffering from a general overproduction. Such talk" we hear in 
times of crisis or depression. Like the preceding error, this con- 
clusion assumes perpetual motion. Of course, it must be noted 
at once that there may be mistakes and overproduction in any 
one industry ; there may be too much cotton grown, for instance. 
Even here, however, there is not too much produced for the 
world to use. The world has never had more cotton than it 
needed. What is meant is that more is produced than can be 
sold at a profit at the prevailing prices — an overproduction in 



10 Tin University of Texas Bulletin 

value, not quantity. But when a man says that a general de- 
pression is due to overproduction, he means not such a limited 
ease but that there is a general inequality between demand and 
supply. Again such a one is to be reminded that the demand for 
goods consists, in the last analysis, of goods produced; for is it 
not true that the only way to secure c:oods is to offer goods in 
exchange"? The only reason why men make things is to exchange 
them for other things that they want. Thus, if all goods are 
produced in greater and greater abundance, each one will get 
more of everything else and no one will lose. A general over- 
production is inconceivable. Until that almost inconceivable 
remote day when man has so conquered the earth as to satisfy 
freely all his wants and nothing has value, there will be ample 
and profitable application for the income of every man in pro- 
duction; and to reason that a nation can overproduce is to as- 
sume that what goes up will never come down. 

A very old case of perpetual-motion fallacy is found in the 
two closely related notions that men can permanently ''make 
work" by not working, and that luxurious expenditure can help 
labor by giving employment. These two ideas illustrate the 
fallacy of the cast-iron caJce. It is a mistake to think that a 
man can eat his cake and have it too. No one has ever discovered 
the bottomless cake. Just so, it is an error to imagine that there 
is a permanent fund of work to be done and that laborers, by "go- 
ing easy" can make that amount of work last longer. The only 
reason why men work and w T ages are paid is that the things 
workers make are wanted and have value. This being true, the 
only source of employment and of wages lies in products, and 
the demand for labor must depend upon these products. But to 
"go easy" and kill time means less products. Let the reader 
draw his own conclusion. Surely the way to make work is to 
make products, and laborers can't lie back and eat their cake and 
still keep it. Temporarily and locally they may do it; but the 
end comes soon. 

So it is with waste and luxury. Mr. Vanderbilt has a $100,000 
surplus. "What shall he do with it ? He can put it in a stocking 
and hoard it. He can invest it, either directly, or indirectly by 
depositing it in a bank. He can "blow it in" by giving a ball 
or purchasing another yacht. Now there are some people who 



Everyday Economic Errors 11 

are so foolish as to argue that the last course is a good thing 
because it gives employment to labor — makes work. But so does 
the investment. And the investment of funds means an employ- 
ment that will increase wealth and consumption : it means more 
railways, more cloth, more flour, etc. Moreover, it means an in- 
crease in wealth which is somewhat "in proportion to work done. 
In short, it means the creation of an enduring source of in- 
creased production in the shape of machinery, factories, etc., 
which will give permanent employment to the laborers and 
their children after them. On the other hand, the luxurious ex- 
penditure means a gratification that is not in proportion to work 
done. Above all, it means in itself but a temporary source of 
employment : it depends upon a repetition of wasteful acts which 
tend to dissipate the wealth of the employer in a wasteful way. 
To defend such a course is but one step removed from advocat- 
ing fire, flood, and war, on the ground that by destroying wealth 
they make work. So they do. But why not work without them ? 
Why tear the building down merely to have the work of building 
it over? All this is waste and is retarding that growth of in- 
dustry which means the largest real progress. It is decreasing 
the total product of labor along with the destruction of capital, 
for labor and capital must work together, and to destroy capital 
— or retard its increase — in the long run, diminishes the demand 
for labor. 

Mr. Vanderbilt can not spend the $100,000 in riotous living 
and have it, too; but he can invest it in productive industry and 
not only replace it but add to it. There are no cast-iron cakes, 
either in the shape of a fixed amount of work to be done re- 
gardless of the productiveness of labor, or in the shape of an 
employment coming from wasteful expenditures which does not 
disappear unless more waste is incurred. Let the reader ask 
himself, "What would happen if all laborers in the world were 
'go easy'? What would happen if everyone were to quit sav- 
ing and investing and spend his money in wasteful extrava- 
gance?" How long could they go up without coming down? 

2. Cart -vs. -Horse fallacy. 

Getting the cart before the horse has deservedly become pro- 
verbial. Now, such inversions are often found in economic rea- 



12 The University of Texas Bulletin 

soning. How often have yon heard your neighborhood store- 
keeper say, "I can make you better prices than that dealer down 
town, because I don't have such high rents to pay." The next 
time he says that just ask him why he doesn't have to pay such 
high rent. Of course he may be getting a gift from some be- 
nevolent landlord ; but this is not likely to be the case. Gener- 
ally it will come out that his location is not so g'>od as that of 
his down-town competitor; his expenses of hauling supplies are 
greater; the number of possible customers who pass his door 
is smaller. In short, in persuading himself that because his rent 
is low his prices must be low. he has put the horse of his logic 
behind his cart. Eents do not determine prices but are deter- 
mined by prices; and his rent is low because, at the prevailing 
price he could not afford to pay the landlord a ay more. If he 
owns the place, the case is in no wise altered, for to sell cheaper 
would be to forego his economic rights and interests as landlord 
and to distribute his rent among his customers. This is no 
doubt done by many storekeepers who do not keep good ac- 
counts, and so act with ignorant benevolence. 

Another common case of wearing the horse as an appendix is 
found in the case of the wages argument for the tariff. Most 
emphatically,, the tariff does not raise wages nor keep them up. 
Why is it that in free-trade England wages are higher than in 
protectionist Germany? Wages depend upon the demand and 
the supply of labor, and these rest respectively upon the utility 
of the products of labor and upon the quantity of available labor 
power. In countries where there is much land and capital rel- 
ative to labor power, the application of labor power will be 
relatively more productive and wages correspondingly high, 
tariff or no tariff. Indeed, the tariff, to the extent that it 
keeps alive industries which are not naturally best' adapted to 
this country, prevents the most productive use of labor and 
capital and so may prevent real wages from rising. Is it not 
clear, where an industry in which we have relatively little ad- 
vantage is kept alive by a tariff which makes consumers pay 
higher prices, that'(l) the laborer's cost of living is increased, 
and (2) that the labor force of the nation is misapplied so that 
it can not produce so much, of the things which men want for 
consumption ? 



Everyday Economic Errors 13 

This erroneous argument as generally applied shows many in- 
consistencies. How about the supply of labor? Will immigra- 
tion be so restricted as to maintain the higher wages which are 
assumed? If not, the hope is vain. Again, where is the vaunted 
superiority of Americas high-paid labor? If it is so efficient, 
what is the need for protecting it from European labor? Surely 
in the competition its efficiency will care for it. 

REASONING WITH THE "MIND'S EYE " CLOSED. 

1. Tin ostrich fallacy. 

It occurred to the writer to call certain errors "ostrich fal- 
lacies" because they arise from the fact that people often think 
that by burying their heads in the material they can escape 
the conclusion that certain immaterial factors are important. 
Reasoning on such a basis may be likened to the attempt to see 
when the mind's eye, or imagination and spiritual vision, is 
defective. Some have denied productivity to the professions be- 
cause they do not directly result in any commodity; but we 
know that production consists not in creating things but in 
adding the quality of utility to the materials and forces of na- 
ture. Thi' two most frequent errors along this line coucern 
retail traders and middlemen, and speculators. 

First, as to the retail trade. The economist does full justice 
to the storekeeper. . He recognizes the fact that it is a valuable 
social service to secure the various commodities wanted by va- 
rious people in various amounts at various times and make them 
available at the place and time desired It is the creation of 
place and time utilities. The retailer takes the risk of keeping 
quantities of perishable goods on hand, goods which may spoil 
or go out of style. He keeps a supply on hand from which we 
may draw at any moment as household exigencies arise ; and his 
stock often includes bulky commodities on which as individual 
purchasers we could not profitably pay transportation. More- 
over through his agency, we get the privilege of selection from 
an assortment, and of careful inspection. He frequently extends 
credit to his customers. He is a necessary link between the* 
consumer and the manufacturing producer, and one is blind 
who calls him a parasite. This does not mean that there may 



14 The University of Texas Bulletin 

not be waste in retailing. The most useful functions may be 
abused and here, as elsewhere, a golden mean exists. We may 
have too many retailers for economy: and we all know towns in 
which far more drug stores and clothing stores exist than the 
needs of citizens require, the result being a wasteful duplica- 
tion of plant and services and a bill for purely acquisitive adver- 
tising which the consumer must pay. Such a condition, how- 
ever, merely illustrates the usefulness of the function. 

It follows from the fact of the necessary function filled by 
the retailer that he need not fear annihilation by the mail-order 
house. In some fields, perhaps, the latter has an advantage, 
and here the interest of the consumer demands that the retailer 
give up. But ample territory is left for the home merchant and 
outside that territory his appeals to local patriotism are selfish, 
illogical, and will prove futile. 

So it is with speculation. Here again we find a most useful 
function Avhich has sometimes been abused. In spite of rabid 
attacks which maintain that the speculator is a gambler, that he 
is nominally buying and selling what he does not own, thereby 
gaining a parasitic' living and making prices higher and more 
unstable, it remains true that with our present industrial or- 
ganization we could not get along without him. Is speculation 
gambling.' Let us see. Speculation might lie defined as in- 
telligent risk-taking, while gambling is unintelligent risk-tak- 
ing. The ignorant "lamb" taking his flyer, in "Wall Street is a 
gambler as truly as the visitor to Monte Carlo. In all pure 
gambling deals three facts are very clear : ( 1 ) the risk is an 
artificial one of pure chance; (2) it is not necessary; (3) one 
of the parties must lose. Now none of these statements is true 
of speculation. Here (1) the risk is one of price changes which 
are in the last analysis, ruled by external economic forces which 
may be judged successfully by experience and skill. (2) It is 
inherent in conditions of production and the markets. (3) 
Both parties may gain : broker A having bought, sells to broker 
B on a rise; broker B holds for a while and sells on a further 
rise to broker C; broker C sells to an investor or consumer. 
All have gained. Ask yourself, "Do prices fluctuate because 
men speculate or do men speculate because prices fluctuate?'' 
You must see that the latter is the fundamental fact. Would 



Everyday Economic Errors 15 

speculation lie done away with if we abolished exchanges? Of 
course not ! It would only be more local, more full of risk and 
violent fluctuation, and more secret. Think of the valuable services 
which our stock and produce exchanges render to society. With- 
out them no continuous and responsive market would be ready 
to evaluate and receive your products; you would be subject 
to the whims of the local situation. As a result there would be 
much wider average fluctuations in prices. Without them the 
shifting of investments which moves the labor and capital of 
the nation from the less productive to the more productive in- 
dustries would take place in a very halting fashion, if at all. 
Now, when the shares of, 'corporations (say Amalgamated Cop- 
per) are sold, following a decrease in net income, and others 
(say I T . S. Steel) are bought for the opposite reason, the re- 
sult is an automatic transfer of capital to the more productive 
field. In this transfer, too, society gets the judgment of skilled 
financiers. Let us as intelligent citizens, not keep our minds' 
eyes closed to the more intangible services which speculative in- 
stitutions afford. 

There is nothing mysterious or sinister about buying and sell- 
ing on a margin. Simply you deposit 10 per cent of the price 
with your broker to insure him against loss and he borrows 
funds to make up the balance. You have made a part payment, 
just as you would in buying a lot, with the idea that an antici- 
pated j'ise in the value of real estate would enable you to sell, 
if desired, with a profit. The chief evil associated with margin 
dealing is that it makes gambling by "lambs" easier, as a 
man can take a "flyer" at less expense. But, in the same way, 
easy credit may lead the incompetent into unprofitable business 
in any industry. 

In this connection a word should be added concerning bucket 
shops. We have "anti-bucket shop laws'' in Texas and other 
States which do not sufficiently distinguish between the service 
of the exchange and the evil of the bucket shop. A bucket 
shop is primarily a gambling joint in which men bet on a chance 
event, Prices are made as a result of sales and purchases on 
the exchanges, which prices are taken as impersonal chance data 
by the shop. You bet with the shop keeper with no intention 
of delivery, and one of you must lose. In dealing with a rep- 



16 The University of Texas Bulletin 

utable stock broker your interests are identical with his, but 
yon are pitted against the bucket-shop keeper. In the one case, 
yon place an order to sell or buy, paying your broker a standard 
commission, and your act enters into the complex of the mar- 
ket forces. In the other, yon bet the keeper of a gaming table 
that a certain stock will go up; if it doesn't, yon lose, and vice 
versa. And yon are no part of the market. Bucket shops fat- 
ten on the optimistic tendency of the public to bet that prices 
will go up, reaping their big harvest in periods of falling prices. 

REASONING WITHOUT THE BOOKS. 

1. Ignorant Sainttiness. 

One of the highest qualities attainable by man is that of for- 
getting self, or unselfishness. This quality raises one near to 
saintliness. But that there are different ways and ends in 
self-forgetting soon becomes apparent when the general virtue 
is applied in the economic field; for there we find a capital 
error arises out of an ignorant overlooking of ones self. For 
example, here is a thrifty, hard-working farmer blessed with 
an equally thrifty and hard-working wife and a Eooseveltian 
family. He owns his land and improvements. At the end of the 
season he figures as follows: "So much from the sale of my 
crops ; I subtract so much for wages of my farm-hands, so much 
for seed and fertilizer; so much for freight, etc.; the snug little 
balance is my profit on this season 's farming. Good. The farm 
is the place for me." But wait. Has our friend reckoned his 
expense account fairly? What about his own months of toil? 
Surely the laborer is worthy of his hire. And the wife and boys — 
what of their services? Have they made as much as they would 
have earned if working for wages? Did ever one see such self 
abnegation! It might well be that a proper deduction of wages 
for self and family would leave a negative balance, and the log- 
ical conclusion follow that he had better sell out and work for 
hire. 

Furthermore, what about his buildings and machinery? His 
Is he "charging off for depreciation?" There are certainly 
some farmers whose accounts would show a loss and many 
whose mirage-like net gains would disappear at such tests. Nor 
is farming alone in this. 



Everyday Economic Errors 17 

2. Undigested Land. 

But this is not the only error which our self-sacrificing' farmer 
may be committing. We hear much of undigested securities 
in connection with crises in Wall Street, but less often direct 
our attention to the rural digestive tract. Now in order to get 
the largest net return or rent from a given area of land, it is 
necessary to push its cultivation on past the point when returns 
begin to dimmish relatively to expenses of cultivation, up to 
the point where the last bit of expenditure in labor and capital 
just pays for itself. As long as a man can clear anything by 
tilling his land more intensively he is failing to get the maximum 
return. Suppose, now, that our friend has 160 acres of land, 
but only enough capital to work eighty acres intensively, that 
is, he has only enough farm animals, plows, buildings, and 
working capital to cultivate eighty acres with such care that 
they are made to yield the maximum return. But in the pride 
of ownership he holds his 160 acres and spreads his labor and 
capital out over them as well as he can, farming very "exten- 
sively.'' Once more he stands convicted of error; undoubtedly 
his most profitable course, considering the present, would be to 
sell say forty or fifty acres and invest the proceeds in tilling the 
remainder intensively or to sell eighty acres and put the pro- 
ceeds out at interest. Thus he would get the maximum return 
from the labor, land, and capital in his possession. 

Of course, we note that where land values are rising the extra 
eighty acres may be held as a speculation with the expectation 
that the increased capital value will offset the failure to farm 
most economically. Nevertheless it is the fact that many Amer- 
ican farmers are suffering from undigested land. We have in- 
herited the idea of large farms and extensive cultivation from 
a day when land was cheap and labor and capital relatively 
abundant. Now, with rising land values the day of intensive 
cultivation is at hand, and land must be more and more care- 
fully tilled in order to secure its maximum value product. The 
large farm will soon be not one of many acres but one of much 
capital. 

We conclude, then, that here are two cases in which men every 



18 The University of Texas Bulletin 

day fall into economic error through failing to reason with the 
books. There are many others. 

There is a third class of errors which arises from the exist- 
ence of classes and special interests. These put beams and 
motes of bias in many eyes. 

REASONING WITH CLASS BIAS'. 

The history of economic thought has been marred and eco- 
nomies perverted by the baneful influence of class interest. 
There have been economic doctrines for capitalists and opposing 
gospels of labor. Landlords have stood arrayed against manu- 
facturers and made tariff sparks fly. On all sides today we 
find errors of intellectual astigmatism which proceed from class 
bias, and it is important to present one or two of the most com- 
mon. 

1. First, there is the none-of-your-business fallacy. This is 
the contention of the employer that the business in which he 
is engaged is "his." Perhaps no delusion has worked such 
strife and suffering during the course of the nineteenth century. 

This contention comes to a head in the use of the injunction, 
for here we find the employer coming before the courts seeking 
to have the law extend its arm against strikes and boycotts on 
the ground that laborers are interfering with his business. And 
not infrequently the courts so respond as to give him a property 
right to the business. Now what is a "business" and to whom 
does it belong? A business is a going combination of land, 
labor, capital, and enterpriser's responsibility, in which these 
various elements co-operate to produce. And it may safely be 
submitted that in this co-operation no one element is so domi- 
nant that it has a right to dictate conditions to the other with- 
out regard to that other's wishes and welfare. Take a business 
in which 50 per cent or more of the cost of the output is labor, 
and is it not astounding that here the employer should deny the 
right of the laborers to an ample voice in deciding upon condi- 
tions of employment ? The time may conceivable come when la- 
borers will furnish the enterpriser's responsibility from their 
own ranks and hire capital and management to work with their 
labor. Then we would look back at the present claims of em- 
ployers as little better than preposterous. The interests of the 



Everyday Economic Errors 19 

employers and of the capitalist class have no worse enemy than 
the man who refuses to recognize the union, and, when a griev- 
ance committee or board of conciliation waits upon him, says, 
"there is nothing to arbitrate." 

2. On the other hand, class bias may appear on the laborer's 
side. A deep-rooted notion that one often finds, both now and 
in the literature of the past, is to the effect that laborers as a 
whole produce more than they receive in wages. Sometimes this 
notion appears in the socialistic doctrine of surplus value and 
"exploitation" of labor by capita^ sometimes in a tirade against 
the wrongs committed by employers, sometimes in a vague won- 
der at the almost endless toil undergone by laborers barely to 
eat their bread in the sweat of their faces. Born of this no- 
tion, several particular fallacies have sprung up and gained 
credence. 

First, there is the fallacy of the dosing-method surplus. 

There are some people, generally socialists, who believe that 
labor now produces a surplus of value above what it gets in 
wages because labor used to produce more and get more real 
wages than it does now. Such people imagine labor as divided 
up into a great number of equal units or "doses," and capital 
likewise. These "doses" of labor and capital are thought of 
as applied or invested on land in a long series. Of course the 
first doses, as everyone knows, unless there are improved meth- 
ods, generally yield a larger return than the last ones. This is 
generally true because the best lands will ordinarily be used 
first and the earlier doses of labor and capital can be more profit- 
ably combined with the land. With a growth of population 
more doses of labor have to be invested, and these later ones 
often yield a diminished return. Then when one looks back at 
the earlier doses with their larger return, one wonders what has 
become of it. Does it not continue to exist as surplus over the 
later returns? Some socialists say that it does, and that the 
capitalist employer keeps it and so the laborer is exploited. 
But a little further thought leads to the question, does the 
larger return to the earlier doses really continue to exist? Is 
there any such surplus? Certainly, time was when labor pro- 
duced more per unit — an.d got more real wages per unit, per- 
haps — -than it now does ; but conditions are changed. Returns 



20 The University of Texas Bulletin 

are diminshed, whatever the past. Each laborer, assuming di- 
minished returns, now produces less. If, under the later con- 
ditions, the average laborer actually produces less, should he 
then receive more than he produces? 

The fallacy comes through keeping the eyes fixed on the old 
condition with its smaller amount of labor and its larger return 
to each labor dose, without seeing that when more labor doses 
are added, the whole condition is changed. The error arises 
from imagining that the various doses of the series ( perhaps 
covering considerable time) remain distinct and unrelated, 
whereas the fact is that they are fused and each addition means 
a new and, after a time, a less productive organization of (lie 
whole. Then, all laborers of the same grade receiving the same 
wage, the average productivity is decreased. 

Again, there is the organization-surplus fallacy. It is rea- 
soned that ten men can do more when working together than 
the same ten, could do as isolated laborers ; the product is in- 
creased to more than ten times one. This "more" should go to 
the laborer, is the plea. But should it? Obviously the increase 
is due to the element of organization which functions in the 
labor of the combined ten. Some one must organize, plan, and 
direct the work of the gang, and the larger the gang the more 
the need for this element. This is what the captain oi' indus- 
try or "entrepreneur" — or his salaried foreman — now contrib- 
utes; and it would have to be done by one of the laborers at a 
suitable compensation in any ease. 

In general, it may be said that it is a sort of blindness in 
the mind's eye which allows these errors to persist; for they 
are largely due to a failure to see that mere effort or labor- 
pain can't make products in any economic sense. By products, 
we mean things which have value, i. e., wealth, and to have 
value things must not only cost labor, but they must also be 
wanted by men. One could chop firewood till doomsday on 
the Equator and it would probably have no value. No amount 
of groaning and sweating can make products unless they are 
desired. No torrent of eloquent barking up the wrong tree 
will fetch down the coon. Thus it is that, hard as it may seem, 
the most severe labor is often the poorest paid. But if such 
labor is little wanted, can any one say that this is unjust? How 



Everyday Economic Errors 21 

else can society insure itself against the wasteful application of 
its forces? It is only by making things that men want that 
labor becomes more than physical exertion — becomes, in short, 
productive. 

To be sure, it is true that thousands of laborers are under- 
paid in one sense or another. In some cases they are ineffi- 
cient producers, and then they must be educated and aided by 
the State; in other cases they are in unprofitable industries, 
when they may be helped by trade schools, employment agen- 
cies, etc. ; in still other cases they are overreached in bargaining 
by their employers, and then they must organize and bargain 
collectively. But sound economic analysis shows that there is 
no general surplus produced by labor off the exploitation of 
which capital fattens. 

Other common cases of class bias are found in the attitude 
of manufacturers toward the tariff, of farmers toward corpora- 
tions, and of wage- earners toward industrial education. , To 
recount all would be an unending task. 

NO REASON. 

1. The Falacy of "Natural Price." 

Some common notions have so little ground in reason, that we 
can hardly honor them with any epithet. Therefore, they will 
be briefly pointed out under the head of "no reason." First 
must be mentioned the fallacy of "natural price." 

Frequently one meets in the press and on the platform, such 
statements as the following - : "The low prices were occasioned 
by artificial causes having no bearing on actual values"; "cot- 
ton growers seem pretty well agreed on the opinion that present 
prices do not express the real value of cotton"; "The natural 
value of cotton is over 9 cents," etc. Such statements have 
been unusually common in Texas lately, owing to the low prices 
which recently prevailed in the cotton market. They indicate 
a fundamentally wrong idea of the nature of value and price. 
What is a "natural." or "true" or "intrinsic" value? Did 
anyone ever see one? Is there any way of knowing value or 
price but by going to the market and seeing what the forces of 
demand and supply will register there? Can a producer sit 



22 The University of Texas Bulletin 

down in the southwest corner and decide that eleven cents is 
the "natural" price and on that basis insist that, however much 
of his product he puts on the market, it "ought" to command 
that price? No. No such thing as a "natural" price exists. 
Price depends on demand and supply conditions and varies 
with their variations. Now it is 15 cents ; now, 5 cents. Either 
is equally "natural." The trouble comes in the producer's fail- 
ure to foresee. the necessary results of larger and smaller out- 
puts, and it must be as futile as foolish to kick against the mar- 
ket results. We now know that the recent low prices for cotton 
resulted from a 16,000,000-bale crop, and those prices are as 
"natural" as the higher ones which preceded them. 

There is no remedy in the cry of natural or real price. The 
producer's recourse lies in a better adaptation of his production 
to the demand, and in some precautions by way of insurance. 
He must use more judgment in regulating his output, and insure 
himself by varying his product. Here would be the place to 
preaeh the gospel of diversification to the farmer. He is a wise 
man, who, instead of putting all his. eggs in one basket, sees to 
it that he has some other resource than cotton (or whatever .the 
specialized product may be) to fall back upon. 

And here is the place to point out that the "law of supply 
and demand" is too often appealed to in an erroneous way. 
That law does not guarantee any "natural" scale of prices. 
Nor does it insure that as the product increases there will be a 
nice, regular, gradual movement of prices. In other words, it 
does not follow because 10,000,000 bales sell at 15 cents that 
20.000,000 bales will sell at one-half of 15 cents or 7 1-2 cents. 
As supply increases, the more intense part of the demand is met, 
and part of the supply, if it is to sell at all, must be sold to 
meet less intense demands. Thus a time comes sooner or later 
when the price must fall very rapidly if the crop is to be dis- 
posed of, and doubling the crop may cause the price to drop 
much more than 50 per cent. It might even cause the price to 
drop to nearly 0. In a word, there is no "natural" proportion 
between the amount of change in supply and the amount of 
change in demand. Consequently, also, there is no "natural" 
relation between the amount of increase in supply and the 
amount of decrease in price. The law of supply and demand 



Everyday Economic Errors 23 

merely states that other things being equal an increase in sup- 
ply will cause some decrease in price. Obviously, if supply 
were to increase continuously, there would come a time when 
cotton would be worth nothing and would be as free as air or 
good advice. It is just as "natural" then that with an increase 
in supply prices should first drop a little and then fall very 
rapidly (i. e., faster than the supply increases), as it would be 
for prices to vary in exact proportion to supply. 

2. DecUvration-of '-Independence Fallacy. 

The Declaration of Independence was a very estimable pro- 
nunciamento. So were the Magna Charta and other venerable 
documents. But all are now largely out of date. Few now be- 
lieve that all men are created equal. And the "inalienable" 
rights to life, liberty, and pursuit of happiness have gone the 
way of predestination and witches. Still, the old belief that, re- 
gardless of reason and changing conditions, certain acts are 
"natural," persists. Thus there is the widespread notion that 
"competition is the life of trade" and competition is the "nat- 
ural" condition of successful industry. On the contrary, it 
has become more and more apparent to economists that' competi- 
tion may often be the death of trade. We must associate with 
"free competition" woman and child labor, long hours, unsan- 
itary conditions, wasteful reduplication of plant, favoritism, 
manipulation, adulterated food products, exploitation of nat- 
ural resources, and a host of ill favored attendants. These 
things sap the vitality of the people and retard the progress of 
civilization, keeping it to a certain brute level far below the 
ideal. Therefore such restrictions on competition as factory 
acts, railway regulation, pure food laws, and conservation of 
natural resources have become accepted policies. Yet we still 
cling to the crumbling doctrine and oppose other restrictions 
upon competition which are just as beneficial. 

In fact, the idea that monopoly is abnormal is quite un- 
founded, though it is a most common error. Economics recognizes 
a class of "Natural Monopolies" which embraces those indus- 
tries in which competition can not normally exist. Here fall 
the municipal monopolies of water, gas, and street railways; 
the steam railways ; and such limited natural resources as the 



24 Thi University of Texas Built tin 

anthracite coal fields. The economist does not mean that here 
competition is physically impossible; for clearly two street 
railways can be built, and two steam roads may be stretched 
between the same termini. The point is that such construction 
is economically impossible. The cut-throat nature that competi- 
tion inevitably assumes in such cases together with the lure of 
great economies in combination, soon bring monopoly. Where 
will you find competition persisting in such industries? 

It is scarcely necessary to draw the further conclusion that in 
sue It rases governmental regulation or management is the nat- 
ural remedy, not individual initiative. 

Perhaps no better illustration of this fallacy could be found 
than that furnished by certain critics of the majority opinion 
in the recent Standard Oil decision. They look with real or 
feigned horror upon the toleration of any "restraint of trade" 
or monopoly. As for the economist, aside from the question of 
judicial encroachment upon the legislative field, he hails as a 
triumph of reason this logical attempt to distinguish between 
reasonable and unreasonable, between natural. and non-natural 
monopoly. To, enforce the old construction of the Anti-trust 
Law would either hamper industry or result in the saddest of 
all dead ones, a dead law. 

A good illustration of the Declaration-of-Independence-fal- 
lacy is found in that provision of the Texas constitution which 
requires that all taxes shall be levied in an " equal and uniform ' ' 
manner. This looks harmless and sounds fair. But what does 
it mean in practice? It has been found to work great inequality, 
and for this reason : some kinds of property are better able to 
bear taxes than others, True justice can only be gained by 
adjusting burdens to ability. It is the height of logical in- 
equality to treat equally people or things that are unequal. Uni- 
formity may be deadening. Every thinking Texan should agitate 
for the repeal of this foolish provision, and so help strike off the 
fetters which now hinder our tax officials, both state and local, 
in their efforts to adjust taxes wisely. 

Another phase of Declaration-of-Independence fallacy is what 
may be called the lion-and-the-lamb-error. It is common in the 
mouths of all optimistic persons who have little acquaintance 
with industrial life. In brief, it is the notion that the interests 



Everyday Economic Errors 25 

of labor and capital are the same, or that there is an "innate 
harmony of interest" between them. Of course, capital and 
labor must work together — so must the members of clubs, fac- 
ulties, and partnerships. But does this mean identity of inter- 
ests or harmony? Far from it! It is true that the larger the 
joint product of the two, the more each may get ; but the amount 
of the "more" is at issue and each is interested in the question 
of how much more. There is always a part of the joint product 
of industry which so far as the impersonal forces of demand and 
supply are concerned might go either to capital or to labor. It 
depends which is the strong holder in bargaining. We know 
that the unions sometimes force raises in the wages and im- 
provements in conditions by strikes, etc. It follows that in the 
nature of the case the two factors stand in the relation of rivals 
and that the solution of the labor problem is not to be found in 
a foolish dream of harmony of interest — of lions and lambs 
lying down together. 

It might be argued that laborers will in the long run get what 
they produce, employers likewise, and so the problem will solve 
itself and the total product be divided without friction. But 
this suggestion assumes perfect competition. No one believes 
that competition is perfect in fact, nor that each one gets ex- 
actly what he produces. Moreover the long run is not apt to 
appeal very forcefully to a starving man. Above all, the ques- 
tion remains, just what do they produce ? how much ? That will 
partly depend, in the laborer's case, upon the kind of a living 
he gets — which involves the whole point at issue. To assume a 
fixed product would beg the question. 

We do not mean to argue that employer and employe are in- 
evitably and always enemies. By conciliation and joint confer- 
ence — or by arbitration, if needs be — their interests may be ad- 
justed. But that this end is not to be gained by a shallow op- 
timism is the point. 

But if one were to attempt to state all the errors that arise 
from a lack of reasoning, one would never stop. Besides, it is 
a task which encourages pessimism ; whereas the truth is that 
the average man is thinking much straighter on economic top- 
ics than ever before. It is not in vain that, as recent statistics 
show, the number of students who each year take an elementary 



26 The University of Texas Bulletin 

college course in Economics exceeds 18,400. And the moral is 
that the time has passed when we merely shudder at the words 
"monopoly" and "regulation," when demagogues can per- 
suade us that stock and produce exchanges are unmitigated 
evils, when a single-taxer can "convince us that by making peo- 
ple pay taxes on land instead of rent we may somehow have 
freer farms, when selfish woolen interests can pull the wool of a 
tariff over our eyes. Every day, economic errors decrease. 



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